Collinson FX: June 14 - The rout on equity markets continued overnight

by Collinson FX 13 Jun 2022 23:14 UTC 14 June 2022

Doyle Sails RNZYS Winter race - May 7, 2022 © Richard Gladwell - Sail-World.com/nz

The rout on equity markets continued overnight, to open the new trading week and spread to bond and currency markets

The ‘red hot’ US inflation number, blew away expectations and destroyed the narrative of inflation having peaked. The headline number surged to 8.6%, which has triggered a surge in US bond yields, with the yield curve briefly turning negative again. This is a technical event, which is an indicator of a looming recession, ahead of the FOMC meeting this week. The Fed was expected to raise rates, but considering the latest inflation number, the question will be, ‘will they raise rates by 50 basis points or more’?

The US inflation surprise followed the ECB meeting, that downgraded GDP growth expectations and the inflation outlook, but failed to raise rates. The ECB indicated they will raise rates, but the lack of urgency will prove very costly. The surge in US Bond Yields and the flight to safety, sparked a further rally in the US Dollar. The EUR crashed to 1.0420, while the GBP slumped to 1.2130, as economic data is reflecting the dire economic position the UK is in. UK GDP turned negative for April, along with Manufacturing and Industrial Production, ahead of the key Bank of England meeting scheduled for Thursday.

Commodity currencies suffered the resurgent reserve, with the AUD plummeting to 0.6930, while the NZD fell back towards 0.6250. These currencies are being slammed by the resurgent US Dollar and the prospect of recession hitting demand, despite high commodity prices. Market turmoil is set to continue.

Commodity currencies have been beneficiaries of strong commodity prices and a softer reserve, with the NZD consolidating above 0.6500, while the AUD looked to regain 0.7150. Rising interest rates attract flows to support these currencies, with the RBNZ aggressively raising interest rates, while the RBA interest rate train has just left the station. Inflation and cost-of-living will drive consumption and demand lower, while the looming recession will be hard to avoid.

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